Feb. 29 (Bloomberg) -- The following is the text of the
Federal Reserve Board’s Fifth District-- Richmond.

FIFTH DISTRICT-RICHMOND

Overview. District economic conditions improved in most sectors
since our last report. Manufacturing activity expanded further
in January and early February. Retail sales picked up and
shopper traffic moved higher. Revenue growth at services-providing firms slowed, while most tourism businesses continued
to post moderate gains. Likewise, bankers reported that lending
to both residential and commercial customers increased slightly,
although the level of demand remained low. Both residential and
commercial real estate contacts cited moderate gains in sales
and leasing activity during the last six weeks, even though the
overall level of demand was weak. District employment improved
somewhat, but both manufacturers and professional services firms
continued to report problems finding qualified workers. Both
manufacturing and services prices received were up only
moderately from our last report, while prices paid moved
significantly higher.

Manufacturing. District manufacturing activity advanced further
in recent weeks. An automotive parts manufacturer reported that
sales remained strong, and the recent strength of sales had
driven an increase in his capital spending for equipment. A
textile producer saw a general pick up across all sections of
his business. He added that his supply of raw materials was
tight, due to the low levels of his suppliers’ inventories at
the end of the year. Similarly, an electrical components
manufacturer described business as still reeling from the
spillover effects of the flooding in Thailand; he stated that
his backlog of orders was large because his suppliers were
unable to fill his orders. A furniture manufacturer cited
improvement in the past few months, noting that his business
usually picks up with rising consumer confidence. Moreover, a
fabricated metal producer indicated that business was strong,
with January orders and shipments increasing by double-digit
rates over December levels. According to our recent survey, raw
materials prices grew moderately from a month ago, while
finished goods prices grew at a slightly quicker rate than a
month earlier.

Retail. Retail sales rose and shopper traffic increased in
recent weeks. Big-ticket sales were generally flat, however,
according to most contacts. Auto dealers in South Carolina and
Maryland experienced a slowdown in sales since our last report.
In contrast, a car dealer near Washington, D.C. said that his
establishment was hiring more sales associates to handle the
increase in customer traffic and sales. Store managers at big
box department stores across the District indicated that sales
were steady or slightly stronger, and remarked that television
sales blipped up just before the Super Bowl. However, the warm
winter resulted in mark-downs on a large quantity of winter
apparel. A central North Carolina store manager reported that
spring and summer apparel had arrived, but the lingering stock
of winter clothing had left little room on the floor for new
merchandise. According to our recent survey, home and garden
retailers reported a pick-up in sales, as did department store
wholesalers. Retail prices continued to rise at a moderate pace
since our last report.

Services. Revenues grew a bit more slowly overall at services-providing firms over the last month. Contacts at professional,
scientific, and technical businesses gave us somewhat mixed
reports. However, an executive at a brokerage firm thought that
account statements were “looking better.” Recruiters in the
Carolinas reported increased demand for permanent employees,
particularly “technical talent.” An executive at a nationwide
trucking firm stated that freight demand increased over the last
month. Finally, a North Carolina hospital contact reported a
major increase in capital spending to meet new healthcare reform
requirements. Prices at services firms moved up at a restrained
pace.

Finance. Lending to both residential and commercial customers
increased marginally across the District over the last six weeks.
However, the level of demand for loans was often described as
weak, and several bankers were still reporting little change
since the end of last year. While most mortgage applications
continued to be for refinancing, loan officers around the
District reported a slight increase for home purchases. Also,
the average size of loans increased. One banker in Richmond
stated that investors, taking advantage of low prices and
interest rates, were a key source of such mortgage lending in
his market. An official for a large bank also stated that his
bank remained very cautious about any consumer loan application,
especially for purchasing a home. On the commercial side,
several bankers extended more merger and acquisition loans. A
loan officer for a regional bank said that his bank had
increased its lending for new equipment as well as for
refinancing. A Virginia banker reported a slight uptick in
lending for inventory. However, other bankers stated that loan
demand in those categories was flat. While most construction
loans other than for multi-family buildings remained limited,
several bankers reported an increase in loans for owner-occupied
facilities and their furnishings (mostly to medical
professionals). Credit standards remained tight, but most
bankers reported that their lending targets were increasing this
year, even though competition for quality loans was intense.

Real Estate. Residential real estate activity showed modest
improvement since our last report. Indeed, some contacts
suggested that the sector had moved beyond the bottoming-out
phase. For example, lower inventory of both new and existing
homes was reported in the D.C. and Richmond areas, with some
builders beginning to sell and even build again. A source from
North Carolina said that a housing development was successful
due to a “rent-to-own” plan. He added that new construction
activity was also starting to occur in the Research Triangle
area. While most Realtors reported that sales were either flat
or up slightly, housing prices generally continued to decline.
Several agents attributed the drop in sales prices, in part, to
short or distressed sales being used as comparables. They noted,
however, that many buyers were avoiding short sales and
foreclosed homes due to often a six to eight month delay in
closings. Most Realtors cited sales in the low-price range as
faring better than sales in the high-price range. An exception,
however, was an agent in the D.C. area, who said that home sales
over $1,250,000 were outperforming all other price ranges. He
added that he was starting to receive multiple offers that were
well above listing prices, and he expected this trend to
continue through the spring selling season.

Commercial real estate activity improved slightly since our last
report, especially for office space. A Realtor in the D.C. area
reported that he had been very busy since the start of this year,
but mostly with inquiries that had yet to turn into closed deals.
He added that so far this year government-related activity was
down. A Virginia real estate agent noted that while office
building purchases remained weak, some clients had increased
their leasing in hopes of purchasing at a later time. While
office rents have stabilized in most areas of the District, many
agents reported that concessions remained widespread. One
Realtor said that, in order to retain struggling tenants, he had
been making repairs and upgrades that would normally be left to
the tenant. Retail leasing activity remained mixed, with one
agent reporting that anchor stores at large malls were stable,
but small boutiques in the same malls were having difficulty
meeting their rent and some were closing. On the industrial side,
data processing and distribution centers were a positive source
of leasing activity, according to several agents around the
District. While industrial demand generally remained weak,
several contacts reported some improvement since the start of
the year. An architectural firm reported an increase in demand
related to site development, suggesting that industrial clients
might be planning construction starts later this year.

Labor Markets. Assessments of labor market activity were
somewhat more upbeat than in our last report. Several employment
agencies stated that demand for temporary workers had increased
and those contacts were optimistic about future demand. A
Baltimore agent noted that the demand for temp workers had
definitely increased, and his company was experiencing a pickup
in recruitment demand for skilled and semi-skilled jobs in the
manufacturing and distribution sectors. He added that the agency
was beginning to see some upward pressure on wages for
manufacturing and distribution center skills, as finding
qualified workers remained difficult. A representative at a
Richmond staffing agency reported that employers were starting
to complain that they were not getting enough qualified
applicants. He noted that even with growth in postings, matching
of openings with qualified people continued to be challenging.
According to our latest survey, District manufacturing
employment improved over the last month, while wage gains were
slightly lower than a month ago. Both retail and non-retail
services employment picked up in recent weeks, while the pace of
average wages in the service sector overall increased moderately.

Tourism. Tourism remained generally strong, with some contacts
reporting further strengthening in recent weeks. A contact on
the outer banks of North Carolina reported a good start to the
year and strong vacation house rentals, with weekend travel up
as a result of good weather. Businesses in that region expect a
good tourism season ahead, supported by such scheduled events as
music festivals, bike races, and marathons. A hotel general
manager in the mountains of North Carolina, where weather was
also mild this winter, noted an increase in bookings, and he
expected modest growth to continue through the summer season.
Elsewhere, several ski resorts have been adversely affected by
the mild Mid-Atlantic winter, and a resort in western Virginia
will cut jobs to reduce costs, according to an executive.

Agriculture. Unseasonably mild temperatures, coupled with below-normal precipitation held back crop yields in some areas of the
District. In North Carolina, tobacco and cotton yields reached
only 50% of historical averages as a result of damage caused by
severe weather last summer. In South Carolina, dry weather late
in the season significantly reduced what was previously expected
to be an outstanding cotton crop. Moreover, results of our
recent agricultural credit survey indicated that farmland values
were slightly below the previous quarter and year-ago levels. In
contrast, ample amounts of rain throughout Virginia, combined
with above-normal temperatures, resulted in above-average yields
and near-record commodity prices for most grain producers. An
analyst in the Commonwealth described 2011 as a solidly
profitable year for most grain producers due to increased export
demand.